output and costs

Output and costs - Output and Costs We finished studying consumer choices income prices(budget constraints preferences(indifference curves Short

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1 Output and Costs • We finished studying consumer choices – income, prices (budget constraints) – preferences (indifference curves) • Now we will turn to studying firm choices – first we study output technology - relationship between factors of production, also called inputs, and outputs • short run vs long run Short Run vs. Long Run • Short Run - when quantity of one factor of production (input) is fixed – typically we think of capital, like heavy machinery, as fixed in the short run – we can vary labor input in the short run by hiring and firing workers, or adjusting worker hours • Long Run - when quantities of all factors of productions can be varied – can adjust the quantities of machinery as well as labor and all other inputs First we will talk about the Short Run • We call the factors that are fixed in the short run the firm’s plant. – e.g. sewing machines for making clothes, blenders for making smoothies, bread machine for making bread… • Tables that show the relationship between the variable input and output – Vary units (worker-hours) of labor – Find total product, marginal product, average product Production in the Short Run Total product: total quantity produced at a given level of inputs. Marginal product: increase in total product given a one- unit increase in a given input. Average product: total product divided by the quantity of the input used. Example 15 5 75 5 17.5 7 70 4 21 23 63 3 20 25 40 2 15 15 15 1 0 0 Average Product (Loaves per Baker) Marginal Product (Loaves per Additional Baker) Total Product (Loaves of Bread) Labor (Bakers) Some Patterns • Marginal Product: – Initially increases: specialization – Eventually decreases: diminishing marginal returns – Law of diminishing marginal returns: • As a firm uses more of a variable input with a given quantity of fixed inputs, the marginal product of the variable input eventually declines. • Average Product: – Initially increases – Eventually decreases
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2 Product Curves • Output on y-axis • Variable input on x-axis • Shape of Total Product Curve – slope steepens at first, then flattens • Shape of Marginal Product Curve – marginal product curve is the slope of the total product curve – so it is increasing at first, then decreasing • Shape of Average Product Curve – increasing, and then decreasing Product Curves TP MP Labor Labor MP L AP L TP Average and Marginal Product Curves • Average product is largest when average product and marginal product are equal • Marginal product curve intersects average product at the point of maximum average product • when marginal is bigger than the average, it pulls average UP; when marginal is smaller than the average, it pulls average DOWN Average Age Example 35 30 36 40 35 50 30 40 25 30 -- 20 20 Average Up or Down? Average Age in Class New Student’s Age When the marginal student age is greater than the average
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This note was uploaded on 12/03/2008 for the course ECON ECON 1 taught by Professor Foster during the Winter '08 term at UCSD.

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Output and costs - Output and Costs We finished studying consumer choices income prices(budget constraints preferences(indifference curves Short

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